Does 3G have a Viable Business case for Emerging Markets?

Martin Varsavsky, CEO FON (largest Wi-Fi network operator) once said “We are sorry for telecom operators who made the mistake of 3G but it’s not our fault”. Another top executive at one of the European operators had once remarked that “For operators, 3G is essentially a waste of money”. There is a lot of media hype in the emerging countries like India and China on 3G roll-out but the business case for 3G is still far from being viable. The expectations of high consumer adoption leading to increase in ARPU are yet to be realized.

In the emerging countries, either the 3G services are yet to be launched or the 3G subscribers are below 10% of the total subscriber base. Only South Africa and Malaysia have higher then 10% subscriber base with 3G subscribers at 10.7% and 18.3% respectively. It is not surprising that these are the only two countries that have high 3G base as the ARPU in both these countries is higher than that in rest of the emerging nations and data ARPU is also higher. I have a theory that either the total ARPU should be over $10 per month or the data ARPU should be over 15% of total ARPU for the 3G services to gain traction. Any country that does not fulfill any of the above two criteria will find it difficult to have a viable 3G proposition. The reason for taking these two as criteria is that if the ARPU is low, it would take a long time to breakeven and it is very difficult to increase the ARPU in any market unless there is a genuine appetite for value added services which is reflected in the greater than 15% data ARPU criteria. In the chart below (click the chart to enlarge), the countries that fall in the lower part of the graph are likely to be less successful in the 3G space while the countries in the blue area are more likely to be successful. China, Indonesia and Philippines are the other three countries apart from Malaysia and South Africa that are likely to succeed in making the 3G a viable proposition. Sri Lanka is a borderline case but given the low ARPU of this market, I am more inclined to say that it would find it extremely difficult to be successful.

The consumers in the emerging nations are highly price sensitive and hence it is not surprising that most of the tariff related innovations have come from such countries. The fall in 2G tariffs led to increase in penetration but the falling tariffs could not compensate by the increase in usage (MoU) leading to sharp fall in ARPUs. Given the income levels in emerging nations, the average amount spent on communication services as percentage of total income is very high and hence I do not see the ARPU levels going up even if the quality of service improves. The consumers are well aware that for the price they pay, they would need to compromise on the quality of services and hence so do mind if the services are not at the same levels as some of the more developed countries. Hence, the consumers are not going to shift to 3G unless there is a killer application that would make them sit up and take note. Unfortunately, there is no killer application on 3G. Most of the current applications like email, chat, social networking, internet radio, etc. work well on the current 2G and 2.5G networks. It is only the experience that is better on 3G due to higher data speeds but there is no 3G only application that has a mass appeal. People initially were gung-ho about the video telephony but now it appears that not too many consumers are enthusiastic about it.

Another common myth is that 3G is more efficient than 2G in terms of operating expenses (OPEX) and hence it would result in higher operating margins for the operators. I do not deny that 3G is much more efficient than 2G but at capacity. 3G has three times more capacity than 2G but since most of the networks across the world are on 2100 MHz, the number of sites required to provide coverage are 2.5 times more than that for 2G on 900 MHz. This means to provide coverage, 3G would be more expensive as it needs more sites but the requirement for capacity sites would be smaller due to higher capacity of 3G. Hence, only if the network utilization were to cross a particular threshold, 3G would be beneficial.

Any operator while launching 3G services would go through the following three phases:

Roll-out for Retention: This is the first stage of 3G network roll-out. In this phase, the carriers are not too sure about the 3G potential and would launch the 3G services in the areas where the high ARPU consumers reside or work. This is essentially a step to retain their high ARPU base and the cost involved in launching full scale 3G services is very high.

Roll-out for Capacity: As the 3G usage increases and more consumers start to adopt 3G services, the carriers need to increase capacity and the coverage area. The business case starts to look better but this phase is the most capital intensive one as well.

Rollout for Cost Efficiency: This is the stage in which the real benefits of 3G services start to appear. The focus of the operators in this phase is to have an optimum mix of 2G and 3G subscribers and looks to switchover to 3G completely as the capacity benefits of 3G come into play. This stage has so far been crossed only in Japan and Korea. In Japan, the carriers stopped offering 2G services around two years back to reduce OPEX and complexity in managing multiple networks.

It is a mistake to assume that 3G services are more cost efficient as the cost efficiency roll-out is the last stage and it can only happen when the first two stages have been crossed. The high population density in developing countries does not mean that the first two stages can be crossed quickly.

I have my doubts on the business case for 3G services in developing countries and unless it can provide a compelling reason for its adoption, the 3G services would continue to pull the EBIDTA down for the carriers.

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About The Author

Mohit

Mohit is a telecom professional with rich experience over 15 years. His expertise is in the area of strategy and planning and his work experience includes stints with two of Big 5 consulting organizations, a telecom operator and a handset vendor. Mohit can be reached at mohit@telecomcircle.com

I agreed with you…even after BSNL / MTNL launch, we have 9000 subscribers.
Moreover China Market have launched 3G nearly 6 months back….they have penetration of ~4% per month only.
Need to get killer apps and low price handset to drive this.
WHo is going to invest where one need to invest $1Bn for Spectrum and another 1Bn for radio nw overlay (minimum coverage)?

South Africa & Malaysia are expected to make a success out of 3 G based on Total ARPU & Data ARPU.

South Africa having population of about 50 Mil and subscriber base growing @ 40% and Malaysia with population of about 25 mil and Mo. Penetration of 98 % are but miniscule markets compared to India & China having a subscriber base of above 400 & 700 mil respectively (Population of India & China above 1.2 billion each) with the Indian mkt growing @ 30% YoY. This gives rise to a few questions:

a. How many markets of the size equivalent of S. Africa can china or india accomodate based only on ARPU – US $ 18.5 and data ARPU of 1.75 (Are 7% of the subscribers in china in the same ARPU category as in S.Africa – I will safely guess – Yes; though Yixin will be better off in confirming)

b. How many Mkts the size of Malaysia with ARPU of above US$ 15 and Data ARPU US $ 3 are there within India or China (Are 8% of the sibscribers in India in the ARPU category of Malaysia – Yes).

I will say there will be many among the subscribers in India who will feel the need to subscribe to the 3G advantage ‘what ever it provides’, (better experience, snob value) to make the critical mass while the world is evolving towards 4G – LTE.

I guess the critical mass of 8 & 7 % in Inida & China respectively will be the driver for making 3 G services affordable and acceptable as happened about 10 yrs back when cellular services were launched in India @ Rs 16/- Per min (USD 0.3) and has been driven to the lowest tariff rates in the world as on date.

As we go along, I suspect WiMAX may steal a march if what Dave says about 3 G comes true and 4 G still a distance away (especially with the way Mohit has sequenced the roll out steps). That ‘elusive’ killer application will be exploited to equal advantage by both 4G as well as by WIMAX – what happens then? Some players taking aggresive positions to be part of the Inida Telecom growth story may be forced to take the WiMAX route when unsuccssful in winning the 3G slot. The results will be out soon hopefully. Winners of 3G slot (if at exorbitant cost as happened elsewhere) may dig their own path towards extinction giving way to WiMAX.

Though Mohit in an article dated 02 Mar 09 has relegated WiMAX to playing a complimentary role to 3G/4G in the long run, I feel it may need a revisit.

One thing 3G operators had going for them in South Africa was an over-regulated fixed line sector. Until quite recently, there was only a single fixed line broadband provider, and the mobile operators provided the necessary competition to drive down prices and expand demand.

Having said that, I don’t think you can look at larger emerging markets as homogenous. A 3G network covering the whole of India might not fly, but I would imagine that, if you analysed ARPU in Mumbai and some of the other large cities, you would have a viable market for it. That is how mobile operators started in South Africa. They first rolled out 3G only in commercial centres and wealthier areas of the major metropolitan centres, before expanding into other areas as demand grew.

The fact that India and China have such large markets, means that a much smaller uptake level can be viable, provided one can target the areas where that market is.

Mobile operators have already begun the process of deploying HSPA data services across their UMTS networks. The lure of high-value and compelling services such as mobile-TV and truly mobile broadband Internet access, is rapidly driving investment in this new technology. HSPA represents a significant improvement in data rates over the initial 3G specification and for the mobile operators it also represents a significant challenge in engineering their networks. With downstream data rates capable of delivering a theoretical 21 Mbit/s, the demand for bandwidth in the radio access network (RAN) is increasing by an order of magnitude from where it is today. Ever growing user uptake and expected bandwidth increases beyond this 21 Mbit/s in the future are all putting increased pressure on the RAN backhaul infrastructure.

As the bandwidths in the RAN increase, revenue per bit falls. For the fixed line operators
offering broadband technologies, such as DSL and cable modems, this situation is nothing new. T1/E1 TDM circuits currently used within RAN backhaul networks are ideal for carrying the high- value voice services but are clearly not optimized in terms of cost or capacity for transport of high bandwidth data services. Therefore the mobile operators face a significant challenge;
how to grow the data service revenues without having an associated cost per bit that makes the economics of the solution unacceptable.

One possible and compelling solution to this problem is the hybrid approach. With the hybrid approach, the data traffic associated with mobile devices is separated from mobile voice services directly at the cell site. Voice traffic can be carried reliably and cost effectively over existing T1/E1 infrastructure whilst HSPA traffic can be backhauled using lower cost broadband technologies such as xDSL, cable modem, and where economically viable, carrier Ethernet. The traffic characteristics of mobile data are closely aligned with the asymmetrical nature of existing broadband solutions and as such a new synergy is developing between mobile and fixed broadband providers.

The opportunity exists for advanced fixed line operators to step forward with a full end-to-end managed service that offers HSPA offload capability to the mobile operator. This should be a complete technical solution that delivers to the Mobile Network Operator (MNO) the interfaces needed to directly interface to the radio subsystems at both cell site and core aggregation locations. It should offer guaranteed SLAs in-line with broadband data availability, monitoring, pro-active fault isolation and recovery. A mixture of transport technologies may be employed to deliver the service and perhaps even multiple operators, but these underlying complexities should be transparent to the MNO. Combine these elements with rapid and flexible bandwidth upgrades and the need for a NGN packet-switched infrastructure is evident. Many fixed line operators have invested heavily already in such infrastructure, exploiting these investments to offer a tailor-made managed service solution which would allow the MNO to concentrate on deployment and optimization of the air interface, service creation and subscriber uptake.

Alternate Technology to work on packet network is ready today to offer a network operator all the features needed to build a complete HSPA backhaul managed service.
In summary, the solution is available for platforms to deliver a solution allowing the transport of TDM, HDLC, and ATM based services over packet-based technologies such as MPLS, IP and Ethernet networks. Whether the underlying transport is xDSL, bonded SHDSL/EFM, native Ethernet on fiber or even point-to-point microwave, Also this technology is designed to make efficient use of the offered bandwidth to ensure MNOs can effortlessly grow their mobile broadband business and the managed service
provider can profit from the new and growing revenues associated with mobile data services and its millions of subscribers.

Now the drag for 3G and beyond is mostly due to our being over traditional.

3G will not cause EBITDA dilution since the incremental OPEX for 3G will be small for operators that have a 2G/2.5G network. Capex recovery will be much harder.
For greenfield 3G operators – both OPEX and CAPEX recovery will be a challenge.

3G consumer adoption will be slow, will be initially restricted to the metros (since this is where the network rollout will happen first). WIll take a few years before you see a significant impact. However the operator marketing machinery will kick in and there will be substantial buzz around new applications/uses of phones.

Martin Varsavsky, CEO FON said that why operator opted for 3G ,in his perception it is a blunder . It is a matter of which technology has a bigger ecosystem to support. It is just like the war between toshiba and sony for VCR and ???. Today 3G has bigger ecosystem supported by bigger companies like ericsson and NSN etc .Which big company is supporting WiMAX ???. What operators are looking for is not just which technology but actually looking for relabile vendor who stand the pressure of market in long run and can keep the supply and innovation.

What happen if government from different countries say that 2G spectrum is not available from say 2020 and all operator has to use the 3G spectrum. It is a win -win sitation for countries like china and India where the population bigger chunk lives in rural area where is there is no basic facility of education, medicine, governence. 3G backed by government can remove this type of divide and bring people to the main stream of economic development.

Earning money from 3G depends on many factors.

How you segment the market.
How you price the services.
Killer application and strategy by which the operator gains the subscriber base.
3 as a telecom operator is a great example to look for pricing and strategy in Europe.

Hi Mohit!
Very happy you raised this issues.It seems sometimes telecoms infrastructure/operators marketeers seemto chase shadows without looking at the kind of figures and scenarios you presented, My worry is regarding the market penetration and ARPU derived from these new technologies( 3/4G) will ever meet expectations.Having stayed in the west to return to Nigeria 2.5 years ago l’m not still that convinced that triple-play functionality hads achieved its anticipated market uptake and whether it would l don’t know. I hope we are not over-hyping the potentialities of these new technologies in terms customer uptake and capability of manufacturers/operators to break-even how much more making a profit.
I think solutions strategist should be looking or be ‘thinking through’ for other potential killer products instead of having us ever revolving round the ‘same’ triple play bandwidth capabilities.True SMS is done great,but l believe there are still a million of other useful products we’ve not looked into that needs exploration.I hope l make sense.

Great question: Great challenge. And great analysis. Looking at the superb graphic we see that of the two largest emerging markets, China is clearly in the ‘blue’ and India in the ‘white’. Yet 3G subscriber uptake in China is still well below plan.

Now let’s consider the future. I predict that 3G uptake will steadily increase in China. The driver will be lower cost 3G enabled devices, Smart Phones, Tablets, Netbooks, etc. combined with Internet-based services. This will create a ‘virtuous circle’ driving down costs, while proliferating devices and services. The ROI will be good.

In India, WiMAX may provide low cost Internet access. Thus by consuming the scarce discretionary spending of users, it may choke the ROI of 3G. Ironically this is “WiMAX vs 3G” rather than vs LTE. I would love to hear others’ comments on this.

As mentioned on LinkedIn, effective demand is a problem in emerging markets– it’s not only about how much consumers can afford on telecommunication, but also whether the services and applications can create enough perceived value to attract enough usage. Before the operators recover their past investments in 3G or 3.5G, 4G will have to wait. 4G may take off soon in North America or Western Europe, but it may take another 3 years or so for China. That’s my guess.

Of all these comments one thing is clear: “Disruptive Technologies” need a “Think Different” attitude. It is difficult for distinct cultures to come together in a world of convergence, with several different business models.

An important think-different-attitude need to be adopted by the telecomm operators. IP communications is all about IT, and efficient packet transfers. And no network design can serve all types of applications. So the telecomm operators, and their networks, can neither carry all the traffic, nor play gate keepers to all communications. Think Internet. Think UC, and client owned networks. This way you will not get in trouble!

… And obviously keep focused on your market limitations, so much more critical in emerging markets. These limitations will require innovation, and simplification of the networks, and collaborative business models.

Pay great attention to quality of your services, and keep them affordable to your clients. This is my main, and final, suggestion.

Of all these comments one thing is clear: “Disruptive Technologies” need a “Think Different” attitude. It is difficult for distinct cultures to come together in a world of convergence, with several different business models.

An important think-different-attitude need to be adopted by the telecomm operators. IP communications is all about IT, and efficient packet transfers. And no network design can serve all types of applications. So the telecomm operators, and their networks, can neither carry all the traffic, nor play gate keepers to all communications. Think Internet. Think UC, and client owned networks. This way you will not get in trouble!

… And obviously keep focused on your market limitations, so much more critical in emerging markets. These limitations will require innovation, and simplification of the networks, and collaborative business models.

Pay great attention to quality of your services, and keep them affordable to your clients. This is my main, and final, suggestion.

Success of 3G in India will purely depend on the spending patterns, provided 3G operators are able to meet promised standards and market their offerings well. Basically, 3G is a luxury and India has potential to absorb huge quantities of luxury items. The demographic and geographic spending patterns of high end mobile handsets could be an indicator for the markets of 3G. I don’t think 3G will become a mass consumption item. So roll-out in metropolitan cities seems quite logical.
Indians are highly price concious and are not quite willing to leave old habits. We did not accept the worldspace radio, which was a paid radio thing, as we grew up listening to radio for free. So paying more for 3G services will also pinch and the 3G take-off could be slow. Though, i personally feel it is too early to write-off 3G completely

Success of 3G in India will purely depend on the spending patterns, provided 3G operators are able to meet promised standards and market their offerings well. Basically, 3G is a luxury and India has potential to absorb huge quantities of luxury items. The demographic and geographic spending patterns of high end mobile handsets could be an indicator for the markets of 3G. I don’t think 3G will become a mass consumption item. So roll-out in metropolitan cities seems quite logical.
Indians are highly price concious and are not quite willing to leave old habits. We did not accept the worldspace radio, which was a paid radio thing, as we grew up listening to radio for free. So paying more for 3G services will also pinch and the 3G take-off could be slow. Though, i personally feel it is too early to write-off 3G completely

Good point raised by you,In country like india where teledencity is below 30% and large section of Rural market is still unpenetrated 3 G seems a Hullaboo.Although product offering and delevery gets much customer centric but there sholud be a sense while offering the services to the customer base in Devloping countries.Why we are running for 3G when 2 G or 2.5 G is not fully utilised here.I agree this will be a shift to better customer experince but what will be the cost justification and how much pocket do we have.
There will always be a gap of Demand and Supply in case of devloping Market,wants to see how the operators does in this scenario…

Though Mohits Data ARPU / ARPU matrix looks interesting, I have a slightly different view.

3G success (if we define financial criteria) as success will largely depend on two parameters

1. Which circle the operator is in.

2. Quality of subscribers in operators network

If an operator is leader in say delhi circle, there is high likely hood that the 3G business case is positive for this operator, while in the same circle another operator with lower quality of subs will struggle to make 3G business case

Thsi is because most of the 3G subs are from operators 2G base. Migratinghigh end users (with higher usage pattern) frees up spectrum in 2G network, allowing more 2G customer acquisition and more usage thus increasing over all revenue

While VAS ARPU uplift due to 3G is still on lower side (but recent global trends suggest they are growing driven by new handsets e.g. iPhone which is driving usage), wireless broadband access on 3G has really a big new upside for 3G operators.

Till now 3G ecosystem has not seen impact on volume from China and India. Today Indian operators are on the last leg of 2G expansion. In a couple of years, 2G growth will start tapering off. Then Operators will shift focus on 3G. The combined volume will ensure drastic reduction in Device, application, network element prices making 3G a mass market proposition with wireless broadband leading this trend

To summarise, 3G may not be financially viable initially (except for a few circle /operator combination), but in 10 years time frame it will make sense. India will not follow trend set up by Europe or Malaysia or SA, the sheer size of Indian market will create a new market dynamcis